Tax Facts
3705 / What is a SAR-SEP? What requirements must be met if a simplified employee pension is offered on a cash or a deferred basis?
A SAR-SEP is a simplified employee pension that is offered on a salary reduction (i.e., a cash or deferred) basis. In other words, the plan permits individual employees to elect to have contributions made to the SEP or to receive the contribution in cash. A SEP must otherwise meet the requirements in Q 3701, as well as those explained below, and the plan had to be established before 1997. No new SAR-SEPs are permitted after 1996, but those in effect prior to 1997 may continue to operate, receive contributions, and add new employees.1
A SAR-SEP may be maintained by an employer who had 25 or fewer employees who were eligible to participate in the plan at any time during the prior taxable year. The amount that an employee chooses to defer and contribute to the SEP is referred to as an elective deferral. Elective deferrals ( Q 3760) are subject to the same cap ($23,500 in 2025, $23,000 in 2024, $22,500 in 2023, $20,500 in 2022, $19,500 in 2020-2021, and $19,000 in 2019) as elective deferrals to IRC Section 401(k) plans.2 Elective deferrals also are subject to FICA and FUTA withholding.3 Certain lower income taxpayers may be eligible to claim the saver’s credit for elective deferrals to a SAR-SEP ( Q 3648).
In addition to the elective deferrals described above, a SAR-SEP may permit additional elective deferrals by individuals age 50 or over, referred to as “catch-up contributions.”4 The dollar limit on catch-up contributions to a SAR-SEP is $7,500 in 2024-2025, $7,500 in 2024, $7,500 in 2023, $6,500 in 2020-2022 and $6,000 in 2017-2019.5 For details on the requirements for catch-up contributions, see Q 3761.
Contributions made by an employer on behalf of an employee to a SAR-SEP are excludable from the employee’s income to the extent that they do not exceed the lesser of 25 percent of “compensation” from the employer, or $70,000 in 2025.6 As a result of an apparent oversight by Congress, “compensation,” for this purpose only, is includable compensation (i.e., does not include elective deferrals).7
The election to defer salary into a SAR-SEP account is available only if (1) at least 50 percent of the employees of the employer eligible to participate elect to have amounts contributed to the SEP; and (2) the deferral percentage for each highly compensated eligible employee does not exceed the average deferral percentage for all non-highly compensated eligible employees multiplied by 125 percent.8 Catch-up contributions are not taken into account for this purpose.9 Compensation or earned income in excess of $350,000 (in 2025) is not to be taken into account in determining an employee’s deferral percentage.10 This amount is indexed for inflation.
A SAR-SEP will not be treated as failing to meet the deferral percentage requirement if, before the end of the following plan year, any excess contribution (i.e., in excess of 125 percent), plus any income attributable to such excess, is distributed or treated as distributed and then contributed by the employee to the plan.11 Such a recharacterization of contributions is not permitted in the absence of regulations.12
Unless the excess is distributed within two and one-half months after the end of the plan year, the employer will be subject to a 10 percent excise tax.13 Any excess amounts so distributed generally are treated as received by the recipient in the taxable year for which the original contribution was made; if total excess contributions distributed to a recipient under the plan for a plan year are less than $100, the distributions will be treated as received in the taxable year of distribution.14
Since an employer may not force an employee to take a distribution of excess deferrals because the contributions are held in an individual retirement plan controlled by the employee, the Secretary of Treasury has the authority to prescribe necessary rules to ensure that excess contributions are distributed, including reporting requirements and the requirement that contributions may not be withdrawn until a determination is made that the deferral percentage test has been satisfied.15 Any distribution or transfer before such a determination has been made will be subject to ordinary income tax as well as to the early distribution penalty, regardless of whether the penalty tax would otherwise apply.16
A plan will not be treated as violating any applicable limit of IRC Section 408(k) merely on account of the making of (or right to make) catch-up contributions by participants age 50 or over under the provisions of IRC Section 414(v), so long as a universal availability requirement is met.17 In addition, catch-up contributions are not taken into account for purposes of the employer deduction limitation explained in Q 3701.18 See Q 3761 for details on the requirements for catch-up contributions.
State or local governments and other tax-exempt organizations may not offer SAR-SEPs.19
1. IRC § 408(k)(6)(H).
2. IRC § 402(g)(1); Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75, Notice 2024-80.
3. IRC §§ 3121(a)(5)(C), 3306(b)(5)(C).
4. IRC §§ 414(v)(1), 414(v)(6)(A)(iv).
5. IRC § 414(v)(2)(B)(i); Notice 2016-62, Notice 2017-64, Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75, Notice 2024-80.
6. IRC §§ 402(h)(2)(A), 415(c)(1)(A); Notice 2024-80.
7. IRC § 402(h)(2)(A).
8. IRC § 408(k)(6).
9. IRC § 414(v)(3)(A).
10. IRC § 408(k)(6)(D); Notice 2024-80.
11. IRC §§ 408(k)(6)(C), 401(k)(8).
12. General Explanation of TRA ’86, p. 639.
13. IRC § 4979.
14. IRC § 4979(f)(2).
15. IRC § 408(k)(6)(F).
16. IRC § 408(d)(7).
17. IRC § 414(v)(3)(B).
18. IRC § 414(v)(3)(A).
19. IRC § 408(k)(6)(E).
A SAR-SEP may be maintained by an employer who had 25 or fewer employees who were eligible to participate in the plan at any time during the prior taxable year. The amount that an employee chooses to defer and contribute to the SEP is referred to as an elective deferral. Elective deferrals ( Q 3760) are subject to the same cap ($23,500 in 2025, $23,000 in 2024, $22,500 in 2023, $20,500 in 2022, $19,500 in 2020-2021, and $19,000 in 2019) as elective deferrals to IRC Section 401(k) plans.2 Elective deferrals also are subject to FICA and FUTA withholding.3 Certain lower income taxpayers may be eligible to claim the saver’s credit for elective deferrals to a SAR-SEP ( Q 3648).
In addition to the elective deferrals described above, a SAR-SEP may permit additional elective deferrals by individuals age 50 or over, referred to as “catch-up contributions.”4 The dollar limit on catch-up contributions to a SAR-SEP is $7,500 in 2024-2025, $7,500 in 2024, $7,500 in 2023, $6,500 in 2020-2022 and $6,000 in 2017-2019.5 For details on the requirements for catch-up contributions, see Q 3761.
Contributions made by an employer on behalf of an employee to a SAR-SEP are excludable from the employee’s income to the extent that they do not exceed the lesser of 25 percent of “compensation” from the employer, or $70,000 in 2025.6 As a result of an apparent oversight by Congress, “compensation,” for this purpose only, is includable compensation (i.e., does not include elective deferrals).7
The election to defer salary into a SAR-SEP account is available only if (1) at least 50 percent of the employees of the employer eligible to participate elect to have amounts contributed to the SEP; and (2) the deferral percentage for each highly compensated eligible employee does not exceed the average deferral percentage for all non-highly compensated eligible employees multiplied by 125 percent.8 Catch-up contributions are not taken into account for this purpose.9 Compensation or earned income in excess of $350,000 (in 2025) is not to be taken into account in determining an employee’s deferral percentage.10 This amount is indexed for inflation.
A SAR-SEP will not be treated as failing to meet the deferral percentage requirement if, before the end of the following plan year, any excess contribution (i.e., in excess of 125 percent), plus any income attributable to such excess, is distributed or treated as distributed and then contributed by the employee to the plan.11 Such a recharacterization of contributions is not permitted in the absence of regulations.12
Unless the excess is distributed within two and one-half months after the end of the plan year, the employer will be subject to a 10 percent excise tax.13 Any excess amounts so distributed generally are treated as received by the recipient in the taxable year for which the original contribution was made; if total excess contributions distributed to a recipient under the plan for a plan year are less than $100, the distributions will be treated as received in the taxable year of distribution.14
Since an employer may not force an employee to take a distribution of excess deferrals because the contributions are held in an individual retirement plan controlled by the employee, the Secretary of Treasury has the authority to prescribe necessary rules to ensure that excess contributions are distributed, including reporting requirements and the requirement that contributions may not be withdrawn until a determination is made that the deferral percentage test has been satisfied.15 Any distribution or transfer before such a determination has been made will be subject to ordinary income tax as well as to the early distribution penalty, regardless of whether the penalty tax would otherwise apply.16
A plan will not be treated as violating any applicable limit of IRC Section 408(k) merely on account of the making of (or right to make) catch-up contributions by participants age 50 or over under the provisions of IRC Section 414(v), so long as a universal availability requirement is met.17 In addition, catch-up contributions are not taken into account for purposes of the employer deduction limitation explained in Q 3701.18 See Q 3761 for details on the requirements for catch-up contributions.
State or local governments and other tax-exempt organizations may not offer SAR-SEPs.19
1. IRC § 408(k)(6)(H).
2. IRC § 402(g)(1); Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75, Notice 2024-80.
3. IRC §§ 3121(a)(5)(C), 3306(b)(5)(C).
4. IRC §§ 414(v)(1), 414(v)(6)(A)(iv).
5. IRC § 414(v)(2)(B)(i); Notice 2016-62, Notice 2017-64, Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75, Notice 2024-80.
6. IRC §§ 402(h)(2)(A), 415(c)(1)(A); Notice 2024-80.
7. IRC § 402(h)(2)(A).
8. IRC § 408(k)(6).
9. IRC § 414(v)(3)(A).
10. IRC § 408(k)(6)(D); Notice 2024-80.
11. IRC §§ 408(k)(6)(C), 401(k)(8).
12. General Explanation of TRA ’86, p. 639.
13. IRC § 4979.
14. IRC § 4979(f)(2).
15. IRC § 408(k)(6)(F).
16. IRC § 408(d)(7).
17. IRC § 414(v)(3)(B).
18. IRC § 414(v)(3)(A).
19. IRC § 408(k)(6)(E).
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